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Offline Algorithms in Low-Frequency Trading

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Re: Offline Algorithms in Low-Frequency Trading

#31

Post by eloff »

smabie wrote: post #25
wbl wrote: post #18

Earlier quoted context omitted.

The only book you should read is John Bogel's. Do what he says like Goldman partners, Bank of America senior executives, almost every economist does with their money and stick it in low cost diversified mutual funds. Or you can learn stochastic calculus and end up in the same place once you realize half of all active traders do worse than the market, before fees.

None of the kinds of people you listed are good at trading (esp economists). From experience, professional traders do tend to use passive indices for part of their PA, but also actively trade a portion. But you're right in that if you don't have a passion for it, you'll never be able to truly outperform spy on a risk adjusted basis. However, if you do have the knowledge and the passion, I definitely think you can. In…

This strategy seems to make a lot of sense to me, so I just checked out the performance of UPRO over the last 5 years versus SPY (^GSPC).

UPRO is up 426% (wow) $17.37-$74.01

and

^GSPC is up 192% (talk about a bull run) $1932-$3714

So with UPRO you would have had an average profit of 65.2% per year, and with SPY 18.4% per year. That's even better than x3 returns.

Plus you'd have the bond returns. Interesting idea.

Re: Offline Algorithms in Low-Frequency Trading

#33

Post by [deleted] »

beezle wrote: post #29
lowfreqtrader wrote: post #2

If low frequency trading interests you, here's a project some people might want to check out: https://github.com/brndnmtthws/thetagang It's designed to sell option premium on major indices (like the S&P500 or NASDAQ-100) to generate mostly passive income, with a fairly reasonable risk-adjusted return. It uses a combination of strategies that involve selling naked puts and covered calls, which both have the same risk…

Generally speaking, a seller of naked puts is looking to supplement income via a stock they are willing to own at a lower level. If you are not willing to take delivery, it is probably better to sell a vertical spread so that there is a built in stop out. Here I'm speaking of transactions of a reasonable premium amount, not 5 or 10 cents. While it is true that the upside is unlimited against a naked call (and the dow…

[deleted]

Re: Offline Algorithms in Low-Frequency Trading

#34

Post by hntrader »

im3w1l wrote: post #7
hntrader wrote: post #3

Earlier quoted context omitted.

What does the tail risk look like on this strategy and what kind of annual return do you expect?

Selling a deep in the money put behaves like owning the stock (probably with margin, but it depends on how many puts you are selling compared to your reserves of cash and short term "safe" bonds) except that you are capping your gains. The further towards out of the money you go the more it behaves like picking up pennies in front of a steamroller . But an interesting quirk of selling puts compared to calls is that t…

That gives me a good intuitive picture. I'd really love a basic online simulator where I can plug in portfolio characteristics (eg percent of calls Vs puts, ATM Vs OTM) and simulate an equity curve over the last ten years. I could build my own of course but I think a tool like this would be generally useful for investors.

Re: Offline Algorithms in Low-Frequency Trading

#35

Post by hannofcart »

Schweigi wrote: post #20
hntrader wrote: post #3

Earlier quoted context omitted.

What does the tail risk look like on this strategy and what kind of annual return do you expect?

I did make my own option trading algo which is similar to the one in the Git Hub repo (but I used Scala, which gave me additional returns, jk :) ). Return totally depends on the delta of the options you write and the option symbols in your basket. Mine could be configured to be between 10-100+%. The higher the return the more volatile. The idea of using multiple symbols like SPY and TLT is to reduce the tail risk. Bu…

Another way to reduce tail risk when selling options is to simply hedge with a protective call/put at a higher or lower strike respectively. Sufficiently far off strikes will have minimal impacts on returns while reducing tail risk.

Re: Offline Algorithms in Low-Frequency Trading

#36

Post by hntrader »

eloff wrote: post #31
smabie wrote: post #25

Earlier quoted context omitted.

None of the kinds of people you listed are good at trading (esp economists). From experience, professional traders do tend to use passive indices for part of their PA, but also actively trade a portion. But you're right in that if you don't have a passion for it, you'll never be able to truly outperform spy on a risk adjusted basis. However, if you do have the knowledge and the passion, I definitely think you can. In…

This strategy seems to make a lot of sense to me, so I just checked out the performance of UPRO over the last 5 years versus SPY (^GSPC). UPRO is up 426% (wow) $17.37-$74.01 and ^GSPC is up 192% (talk about a bull run) $1932-$3714 So with UPRO you would have had an average profit of 65.2% per year, and with SPY 18.4% per year. That's even better than x3 returns. Plus you'd have the bond returns. Interesting idea.

Isn't UPRO just a leveraged SPY. Seems different to the above option selling strategy

Re: Offline Algorithms in Low-Frequency Trading

#37

Post by hntrader »

atomicnumber3 wrote: post #22
joshribakoff wrote: post #19

Earlier quoted context omitted.

Buffet sells 5b in options premium a year

I think a big distinction that retail traders need to come to terms with is that, while yes, technically you can make reasonably good sums of money with various trading strategies of various risk profiles, as one person, so many of them are just not worth the trouble. If your passion is this sort of thing, by all means, go ahead. But it's like running a homelab. Yes, you can get pretty decent "savings" (vs running in…

I wonder if we can invest in a fund manager who does this strategy. And if it's so good then why do pension funds and endowments not allocate to it typically.

Re: Offline Algorithms in Low-Frequency Trading

#38

Post by smabie »

eloff wrote: post #31
smabie wrote: post #25

Earlier quoted context omitted.

None of the kinds of people you listed are good at trading (esp economists). From experience, professional traders do tend to use passive indices for part of their PA, but also actively trade a portion. But you're right in that if you don't have a passion for it, you'll never be able to truly outperform spy on a risk adjusted basis. However, if you do have the knowledge and the passion, I definitely think you can. In…

This strategy seems to make a lot of sense to me, so I just checked out the performance of UPRO over the last 5 years versus SPY (^GSPC). UPRO is up 426% (wow) $17.37-$74.01 and ^GSPC is up 192% (talk about a bull run) $1932-$3714 So with UPRO you would have had an average profit of 65.2% per year, and with SPY 18.4% per year. That's even better than x3 returns. Plus you'd have the bond returns. Interesting idea.

UPRO is only 1/3 of your portfolio, so you have the same exposure as SPY i.e: you are not going to make those crazy returns.

The idea is to get cheap borrowing by using a leverage ETF and then buying bonds such that the bond yield > cost of leverage.

Re: Offline Algorithms in Low-Frequency Trading

#39

Post by StrangeDoctor »

eloff wrote: post #31
smabie wrote: post #25

Earlier quoted context omitted.

None of the kinds of people you listed are good at trading (esp economists). From experience, professional traders do tend to use passive indices for part of their PA, but also actively trade a portion. But you're right in that if you don't have a passion for it, you'll never be able to truly outperform spy on a risk adjusted basis. However, if you do have the knowledge and the passion, I definitely think you can. In…

This strategy seems to make a lot of sense to me, so I just checked out the performance of UPRO over the last 5 years versus SPY (^GSPC). UPRO is up 426% (wow) $17.37-$74.01 and ^GSPC is up 192% (talk about a bull run) $1932-$3714 So with UPRO you would have had an average profit of 65.2% per year, and with SPY 18.4% per year. That's even better than x3 returns. Plus you'd have the bond returns. Interesting idea.

You absolutely do not want to own upro for 5 years. High fees and more importantly beta-slippage will eat you alive.

Re: Offline Algorithms in Low-Frequency Trading

#40

Post by smabie »

StrangeDoctor wrote: post #39
eloff wrote: post #31

Earlier quoted context omitted.

This strategy seems to make a lot of sense to me, so I just checked out the performance of UPRO over the last 5 years versus SPY (^GSPC). UPRO is up 426% (wow) $17.37-$74.01 and ^GSPC is up 192% (talk about a bull run) $1932-$3714 So with UPRO you would have had an average profit of 65.2% per year, and with SPY 18.4% per year. That's even better than x3 returns. Plus you'd have the bond returns. Interesting idea.

You absolutely do not want to own upro for 5 years. High fees and more importantly beta-slippage will eat you alive.

by beta slippage you mean volatility drag? On a risk adjusted basis, upro is definitely a loser due to volatility drag and high expense ratio. However, you can easily calculate optimal leverage ratio in order to maximize the geometric growth of your portfolio. The equation is:

lev = E(r) / Var(r)

So if the expected return is 10% and the expected volatility is 10%, optimal leverage to maximize geometric growth is 10x.

This of course is much too high and the risk of losing everything due to excessive kurtosis and downside skew is very high. Like the everything else in finance, fundamental sin of that formula is assumption of the log normality of returns.

However, is 3x too high for the long term? I dunno, but over long time periods, a pure 3x leveraged spy portfolio is going to outperform significantly. The problem is most people will be unable to weather the storm as you can easily lose half of your money in a week.

I wouldn't hold pure spy 3x and wouldn't exactly recommend it, but from a mathematical perspective it is a defensible (as in, you can make cogent arguments for it) long term investment.

On the other hand, I would probably recommend 1.5x lev or possibly even 2x lev to certain people.

As a quant, I approach these things like leverage from a mathematical perspective. It's important not to have an emotional reaction. There are very smart people running books that have 10x leverage but you would never be able to guess by looking at their volatility. It's all about the factor exposures, net delta, etc.

For example I've seen 15x leveraged delta neutral books that have absolutely insane Sharpe ratios (>15) and annualized volatility of less than 5%.

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